Intel (NASDAQ:INTC), the leading PC microprocessor manufacturer, will announce its Q3 2013 earnings on October 15. The persisting decline in PC shipments, combined with increasing investment in building its technology prowess, has impacted Intel's revenue growth as well as its bottom line. The company closed its fiscal 2012 with 1.2% and 15% declines, in annual revenue and net income respectively. Intel reported a 2.5% and 5.1% y-o-y decline in its Q1 and Q2 2013 revenues, respectively, as PC shipments continued to decline drastically in the first half of 2013.
In its last earnings call, Intel admitted that it expects the overall PC market for 2013 to be weaker than originally anticipated. It now expects its 2013 annual revenues to be flat and gross margins to be around 59%. Nevertheless, the company continues to believe that the macro situation will improve in the second half of 2013, as the industry accepts innovative form factors in ultrabooks, convertibles and detachables.
Our price estimate of $29 for Intel is at a significant premium to the current market price of around $23. While we agree that slowdown in PCs will impact Intel's short term growth, we believe that the company has the capability and the technology prowess to re-accelerate its growth in the future.
PC Shipments To Decline For The Second Consecutive Year In 2013
The cannibalization by tablets and smartphones, combined with a weak reception for Windows 8 OS, the slowing enterprise market, consumer softness in mature markets (the U.S. and Western Europe) and the slowing demand from emerging markets are the main factors leading to the slump in the PC market. PC sales declined marginally in 2012, and research firm IDC estimates shipments to decline by 9.7% in 2013.
IDC expects the negative trend to persist next year as well and predicts a modest growth 2015 onward. However, while overall PC shipments are forecast to decline for the next few years, IDC estimates the portable PC segment to grow at 8.7% between 2013 – 2017.
Despite its increased focus on the expanding mobile computing market, Intel continues to derive over 60% of its revenue from the PC market, and thus is highly sensitive to any adverse development in the industry. Intel is coming out with a number of new portable PC designs (form factors in ultrabooks, convertibles and detachables) in the next few quarters, which it believes will help spur demand for its processors in the future.
New Products Will Help Spur Future Demand
Despite the grim outlook, the company believes that its upcoming products and platforms can fuel industry demand in the future.
- The Bay Trail Platform Can Help Gain Share In Tablets & Low-Cost PCs: Based on one of the biggest chip architecture advances in Intel's history (Silvermont), Bay Trail is the company's first quad-core Atom SoC. With Bay Trail, Intel intends to extend its product line across screen sizes and price points in tablets as well as low-cost PCs.
Intel's earlier Atom SoC based on Clover Trail and Clover Trail+ platforms were present in a relatively small number of tablets. Backed by some recent high profile design wins such as the Samsung Galaxy Tab, the company now accounts for 4% – 5% of the global tablet market. In its Q2 2013 earnings call transcript, Intel stated that it is gaining market share in tablets and aims to quadruple its tablet volumes this quarter, compared to Q1 2013.
With the official launch of new versions of its Atom processors (Z3000 series-Bay Trail), Intel feels confident of grabbing a larger share of the market in the future. Additionally, Bay Trail can also help Intel increase its presence in the low-cost PC segment, an area historically dominated by AMD.
- Merrifield Platform For Smartphone: At present, Intel has a near zero share in the smartphone market. Its upcoming Merrifield platform is also based on the Silvermont platform and is specifically designed to increase the company's competitiveness in the smartphone market. Additionally, Intel currently ships the single-mode 4G LTE data solution, but will start shipping multimode voice and data LTE baseband solutions by the end of this year. Despite intense competition in the market, we think an expanding mobile portfolio can help Intel increase its penetration in the smartphone market.
- Haswell To Spur Demand For Higher End PCs: Intel recently launched its fourth generation core processor family, code-named Haswell. The processor promises to offer improved performance, strong graphics and up to 13 hours of battery life (the biggest improvement in battery life in Intel's history), in turn enabling a broad new range of ultra-sleek designs across multiple form factors like the 2-in-1 convertibles and other touch-enabled devices.
Intel claims that around 70% of today's Ultrabooks are touch enabled and anticipates the number to reach 100% by this year end. (Intel announces Bay Trail tablet CPU, part two, TechEYE.net, September 13, 2013) The 2-in-1 devices can help spur demand for Intel processors as they offer customers the benefits of a PC and convenience of a tablet. Around 60 designs ranging between $349 and $999 are expected to hit the market in the near future.
Disclosure: No positions